Why is China’s yuan-internationalisation push failing to meet expectations?
- Beijing has been trying to get more countries to use its currency for years, but until these hurdles are cleared, the yuan’s rise as an international currency ‘will have a ceiling’
- Analysts, economists and monetary officials weigh in on what still needs to be done, and Hong Kong could play a key role
Beyond trade, conducting more financial market deals in China’s currency would be a critical step toward Beijing’s goal of boosting overseas use of the yuan, and the financial hub of Hong Kong should play a vital role toward that end, monetary officials and economists said on Friday.
Wang pointed out that the yuan’s use abroad has mainly been relegated to payments and trade settlements.
“But the internationalisation of a currency is not just about trade. Whether it can be used to denominate and settle in massive financial transactions is a very important indicator,” said the former vice-president of the Bank of China and a former board member for Swift, the international financial payments system.
“If the yuan cannot be widely used in financial markets, its achievement as an international currency will have a ceiling.”
To reduce its dependency on US dollars, the world’s second-largest economy has long been keen on increasing the yuan’s use overseas, and Russia’s invasion of Ukraine last year served to accelerate that process, as Western sanctions on Moscow showed how devastating it can be to depend on the dollar.
In response, China and Russia started settling more trade in the yuan, which has also become Russia’s reserve currency.
But the currency’s overseas expansion is still curtailed by a number of factors, including being less convertible than the US dollar or euro, and because Beijing maintains strict capital controls over it.
As a result, more than 70 per cent of overseas transactions using the yuan are going through Hong Kong, a key offshore yuan business hub where capital flows freely.
Eddie Yue Wai-man, the head of Hong Kong’s monetary authority, said during the summit that Hong Kong can play a bigger role in promoting the use of yuan in capital markets.
“For example, for some overseas companies that have already used the yuan for trade settlements through Hong Kong, if they can easily invest their money into the mainland’s capital market through some financial products in Hong Kong, then it could further derive more demand for payments, settlements and investment in the yuan,” Yue said.
“More importantly, it could help promote the use of the yuan in global cross-border business and financial investments.”
Meanwhile, Wang said that the future centre of yuan internationalisation should return from offshore to onshore, and that China must deepen reforms of its domestic financial infrastructure while doing more to promote opening up.
“If our domestic financial transactions cannot attract massive international investment, or most international financial sanctions cannot be denominated or settled in the yuan, the space of its internationalisation will be largely restricted,” Wang said.
He added that increasing the yuan’s share as a reserve currency among other countries will be even more challenging, as doing so necessitates higher standards for the currency’s security, liquidity and profitability.
Jean-Claude Trichet, former president of the European Central Bank, said during the summit that if the yuan were to become fully convertible in mainland China, it would alter the landscape of the international monetary system, by creating a trifecta of major currencies with the US dollar and euro.
“The [yuan] needs to have more profound depth and liquidity,” he said.
Additional reporting by Kandy Wong
